RBI may cut lenders’ key debt ratio next fiscal

SummaryThe Reserve Bank of India is considering cutting the held-to-maturity ratio for lenders starting in April, while also looking into bond purchases via open market operations in the next two months to improve liquidity, deputy governor HR Khan said on Saturday.

The Reserve Bank of India (RBI) is considering cutting the held-to-maturity (HTM) ratio for lenders starting in April, while also looking into bond purchases via open market operations in the next two months to improve liquidity, deputy governor HR Khan said on Saturday.

A cut in HTM — which is a type of debt that banks must hold till maturity — is aimed at spurring banks to lend more and boost a sluggish economy poised to grow at its slowest pace in a decade.

The limit is currently set at 25% but traditionally has been aligned with the banks’ statutory liquidity ratio (SLR), or the mandated portion of deposits which banks must invest in government bonds and other approved securities, which is currently at 23%.

“Maybe we can do it in a phased manner, quarterly basis, half yearly basis till the time it is phased out,” Khan said on the sidelines of a conference in Colombo, regarding reducing the gap between the SLR and .

“Implementation could be from early next year,” he added, referring to the fiscal year that starts in April.

The RBI had said in October it was looking into a recommendation from a central bank committee to cut the HTM ceiling, bringing it in line with the SLR.

Traders have said a reduction in the HTM limit could hit bond prices, given debt supply would increase as banks would be allowed to sell some of their tied-up securities.

Khan said the RBI could still resort to OMOs in February and March, the last two months of the current fiscal year, and was watching government spending.

“As things pan out we will see and if it is becoming a pattern we will do OMOs in addition to CRR,” Khan said, referring to reduced government spending. “There could be OMOs in the next two months,” he added.